Budgeting

Budgeting as the main controlling tool

to logistical management support

Justyna Dobroszek

Department of Accounting, Faculty of Management

University of Lodz

Lodz, Poland

[email protected]

Żaneta Pietrzak

Department of Accounting, Faculty of Management

University of Lodz

Lodz, Poland

[email protected]

Abstract - Budgeting may be called the language of today's

organizations. It is a fundamental tool used by managers in

decision-making and to establish guidelines for the future of

business. Therefore, it is very important to construct a proper

budget, that will consistent with to the entity specifics as well as

with the needs of managers. Only business entities that

harmoniously combine nature of the business and surroundings

conditions can identify and exploit their opportunities.

There are various forms of the budgeting, but an implementation

of the ABB – Activity -based budgeting enables logistics

companies to look at their business from a different perspective.

The budget should give a faithful reflection of the business, not

just a reflection of the collection of the costs that often in

connection with the activities performance is illegible and

ambiguous. Activity-based budgeting can motivate employees

and enable them to stronger identification with both the activities

carried out within the company as well as the entire company.

Analysis of the data in the new approach will allow for a deeper

understanding and the ability of continuous improvement of

processes and identified activities (it is important given the

ongoing development of the sector and the strong competition).

This new system has to show so a relationship of the cause-and-

effect in the enterprise, so that decisions will be supported by

relevant calculations and they may be a base to decision making.

Keywords: logistics company, logistics costs, budgeting, Activity-

based budgeting (ABB)

I. INTRODUCTION

Budgeting is one of the most effective tools of management accounting system, which is used for planning and control of costs, revenues and results of the business activities within company.

Budgeting as supporting tool of management is used first of all to analysis of manufacturing companies. In the recent years but there has been strong growth in the number of logistics services providers. On the global market there is a large number of logistics companies that offer various logistics services. This diversity of the logistics services causes an occurrence of different logistics costs, which are depend on their nature, so these can be called as e.g. transport costs or storage costs.

Taking into account increased importance of the role of logistics service providers in the market and the specific nature of their business, including issue of the logistics costs structure, the authors want to present the concept of budgeting

within logistics companies, taking into account the traditional budgeting and activity-based budgeting (ABB).

An aim of this article is to identify the essence of this issue for both the scientific and as well the practitioners. Methodology used in this article is mainly based on review of the selected literature from this scope. It is worth noting that there are not a lot of empirical studies about an implementation of the budgeting only within logistics companies, and also the available literature describes this problem very superficially. This means that the issue of the budgeting within logistics companies requires in-depth further analysis both from practical and as well theoretical point of view, in order to develop an appropriate and useful model of budgeting for logistics activities.

II. THE IDEA OF FUNCTIONING OF THE LOGISTICS

ENTERPRISE AND ITS SUPPORTING SYSTEM

An increasing globalization has led to the emergence of modern sector that is called: Transport-Shipping-Logistics (TSL- sector) and to its dynamic development in the recent years. This trend has a number of sources, which include e.g.:

transfer of production processes to distant countries;

the formation of corporations, what is related to the decentralization of business activities and to the emergence branches or subsidiaries;

outsourcing a variety of activities and processes;

new customer needs, for whom an important factor of purchase is the time, in addition to price and quality.

Above mentioned aspects have contributed to the emergence of new forms of "product", called logistics service. Initially, the logistic function, especially transport was implemented by production companies, but later a lot of business entities recognized the benefits from the transfer of logistics processes to companies that specialize in logistics activity, which are called logistics companies. Outsourcing of logistics processes let to lower costs and improve the quality of the logistics process. The logistics services have an effect on increasing products value supplied to the customers [1].

Nowadays, TSL - sector covers a diverse dimension of the logistics service providers. The logistics company is defined, for example, as "an external supplier that performs all or part of the logistics functions" [2] or as "a company that creates a variety of logistics concepts and implements them in the form of the service" [3]. In the literature, there are several

SECTION5. Financing and Accounting

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classifications of logistics providers, but generally they can be classified as a single party logistics service providers, such as e.g. repackaging companies, storing companies or transport companies (specialised on air transport, rail transport or road transport). The second type of business entities are called as a system service providers which offer a comprehensive suite of services, e.g. contract logistics. This kind of the logistics companies create also the supply chains and management them. The system logistics service providers includes, among others Third Party Logistics Provider (3PL) or Lead Logistics Provider (LLP) [4].

Logistics sector despite the fact that achieves high turnover and is called as “a barometer” of the national economies, this however, within his structure occur various transformations that affect activities of logistics service providers. The growing demand for logistics services has contributed to the emergence of strong competition in this sector. Therefore, within the logistics market will survive those companies that offer innovative logistics services and are able to adequately manage their logistics processes and, above all costs, including the logistics costs. Thus, the logistics companies should implement a special system used to support the logistics management, which is called a system of the logistics controlling, with properly chosen and implemented tools.

One of the most popular and most effective tools to support the management of the company is budgeting. In business practice, budgeting is defined as a process that involves specific phases and steps that, are performed in sequence, but the number of the separate phases and stages is a matter of individual approach to the concept [5]. As has been described by A. Karmanska, the budgeting is an instrument that gives the efficiency to the implemented strategy and supports the strategic planning for the diagnosis of the reality of strategic tasks [6]. As budgeting plays an important role in supporting of the management of production processes, so this tool also has an importance in the context of planning and control the logistics processes, including the logistics costs.

The budget may take the form e.g. of the traditional budget and activity-based budget (ABB). Budgeting logistics costs in the form of the traditional approach will be characterized in the following paragraph.

III. TRADITONAL BUDGETING OF LOGISTICS

COSTS

Logistics companies achieve revenues by offering logistics services such as e.g. mainly transportation or storage. At the same time the provision of the logistics services generates different kind of the logistics costs. In view of the fact that the statutory activity of these business entities is based on logistics activities, this means that the majority of the basic costs incurred in the logistics company, they will be logistics costs. Logistics costs are a detailed category of costs indicating a consumption reflection of the company's assets, resulting from planning and control of flow of goods, materials in space and time [7]. Consequently that the logistics processes are so varied and they may include for example: transportation, storage and other logistics services, ,it not possible to include all logistics costs in one universal model. Logistics costs have a complex structure and are dependent on the capabilities of

registration systems and the size of the company. If the service provider performs only transport service, the scope of the planned logistics costs will be only limited to the costs of transport. However this, if the logistics company proves more and different logistics services, the scope of logistics costs for planning and control is more complex and wider.

Budget of the logistics costs can be defined as a picture of planned costs of logistics processes with their breakdown on among others types, forming departments and periods. The budget is a kind of limiter for the costs [8]. The traditional budget of logistics costs determines the generic range of logistics costs recognized in the budget, specifies the locations (areas of their origin) and sets the periods which limits of costs have been fixed for.

Budgeting of the logistics costs is a complex organizational and economic undertaking, due to implemented by the companies a variety of logistic processes, but also because of adopted the different strategies. Many modern logistics operators do not use its own resources, but they transfer the processes to the business partners. For example they can move transport to the contractors or rent the transportation or the warehouses. This means that the structure of logistics costs will systematically vary, depending on the form of the action accepted by the logistics provider. The overall scope of budgeting within logistics activates shows “Figure 1”.

Traditional budgeting of the logistics costs is mainly based on costs by nature and it also is focused on the costs approach to place (function). These kind of the cost accounting systems have used by the logistics companies. Below the authors show an example of costs by nature for the transport service. Assuming that the division “X” within logistics company “ABC”, specializes in transport service undertaken mainly by its own means of transport (e.g. trucks) and supplemented by the use of transport subcontractors, sample the range of costs that should be included in the budget of logistics costs (transport costs) are presented in “Figure 2”. It is worth emphasizing that in this case the budget can be divided into an area that is associated with a purely "physical" process of transport and into an area that is associated with support of implementation of logistics services. On the one hand detailed structure of logistics costs may increase the accuracy of analysis and information about costs for the purposes of their control, on the other hand, the acquisition of such dimension of the data, it is difficult to implement in business practice.

Figure 1. Budgeting of the costs of logistics processes.

forecast of services sales

forecasting of transport

costs

forecasting

of storage costs

forecasting of other logistics

costs and non-logistics costs associated with the provision

of logistics services

“physical” costs of logistics

processes

the costs of the implementation

of logistics services

forecast of logistics costs


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Planned type of costs - the physical area of the process

Fuel (e.g. natural gas, gasoline. diesel)

Wages and salaries (e.g. drivers, mechanics)

Other costs of materials needed to repair and maintenance of transport

Spare parts (e.g. tires and other tools used to improve and maintain the

vehicles)

Taxes and other charges (e.g. transport charges, toll roads, rents, fines)

Insurance costs for e.g. drivers, vehicles

Energy

Depreciation of transport

External services (e.g. service, car washing, transportation subcontractors)

Insurance and other benefits to employees serving transport (e.g. the costs of

protective clothing, equipment drivers)

Other costs by nature

Planned types of costs - administrative area that support the process

Salaries of employees serving transport orders

Third-party services costs (e.g. phone related to the transport orders)

Raw materials (e.g. paper, toner, software, etc.)

Other costs (e.g. travel expenses, training)

Depreciation (e.g. hardware)

Taxes and fees (e.g. authorization of the order)

Planned types of costs - the general level of the business entity

Figure 2. Sample view of costs in the unit responsible for drawing up the

budget for the area of transport cost.

As shown in the “Figure 2”, the cost of logistics from area of transport should divided into two main areas of planning costs. The first area is focused first of all on the transport process, dividing it into subarea of physical transport (physically approach) and subarea of supporting for the implementation of transport service (organizational approach). The second main area is concentrated on the overall costs of the logistics company.

Another example for budgeting of transport costs was presented by M. Biernacki, R. Kowalak (see “Figure 3”). Authors have focused mainly on planning cost of the transport process taking into account the types of costs by nature, breakdown cost into fixed and variable costs and also simple and complex costs.

Figure 3. Budget of transport costs. Source: Adapted from M. Biernacki, R.

Kowalak [9].

There are several approaches to creating budgets of logistics costs, However, it is important in this process that the budget is readable and enables the correct current costs (logistics costs) control. If a business entity cannot plan properly costs (logistics costs), this will have a bad impact on the financial results and also on other costs analysis, which are needed to make management decisions.

Analysis of logistics activities (logistics processes) should base on an wide analysis that contains different issues, e.g. analysis of the involved resources needed for logistics, analysis of the, implemented logistics processes, analysis of the processes related to the general operation within enterprise. In this case, the costs drivers are determined directly by the kind of services and used resources. Therefore, the logistics cost budgeting should be accomplished better using the activity-based budget. By implementing of the activity-based budgeting the logistics companies may better reflect the nature of the logistics activities. Another point of the article will describe wider this aspect.

IV. ACTIVITY –BASED BUDGETING FOR LOGISTICS

COMPANY

Activity-based budgeting is an extension of activity- and capacity-based concepts into the budgeting realm [10]. The development of activity-based costing and management led to an immediate desire to extend the methodology into planning and budgeting [11].

ABB method requires the costs determination of the planned activities based on their expected size and resources which they use. This allows to create a budget based on operational activities that are necessary to sale services offered by the company. Activity-based budgeting procedure includes the basic principles of traditional approach such as: reliance on a long-term business strategy, consolidation of budgets of individual responsibility centres into one global budget, coordination and communication process and later monitoring and analysis of occurring deviations. However, the basis for the ABB is ABC. Therefore, necessary for this concept of budgeting is understanding and correct implementation of the objectives of ABC. The basic categories that must be defined for each company who want to implement ABC and then ABB are among others: resources, activities and cost objects. Examples of these categories for a logistics company are shown in “Figure 4” (the direction of the flow of information is consistent with the ABC).

Activity-based costing is an accounting methodology which link the following elements:

Resources – all the components of economic, which the company uses in the course of carrying out activities,

Activity – a set of repeatable, homogeneous or similar events and operations performed order to achieve a specific business function, as a result, costs are generated,

Costs objects - the cause of the actions, this can be a product, the whole consignment, contract, order, customer group or even part of the company.

Type of cost Unit Number

of units

Rate

per

unit

Variable

costs,

containing

rate of

variations

Fixed

costs

Total

costs

Simple costs:

Fuel litre 5 000 4,00 20 000 20 000

Cost of

materials and energy

plan 1 000 1 000

Cost of

service

hour 30 10 60 540 600

Wages and salaries

hour 500 20 8 000 2 000 10 000

Insurance and

other benefits

% 20 1 600 400 2 000

Taxes and fees plan 2 000 2 000

Depreciation plan 10 000 10 000

Other costs by

nature

plan 100 400 500

Complex costs:

3 000 4 000 7 000


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Figure 4. Sample view of resources, activities and cost objects in logistics company.

Activity-based budgeting is the preparation and use in the management of the budget based on activities performed within the business entity, which is important for the creation of value, rather than as it is in the traditional approach, focusing on resources. Budgeting procedure is presented in “Figure 5”.

Budgeting procedure is closely connected with the strategy, so the budget includes actions in the long term, in order to achieve long-term goals. Activity-based budgeting refers to the actual processes taking place within the company in all its areas (generally business is divided into the process by which consists of the specified activities). This method, however, allows managers in the process of negotiations based on actual data, rather than the power and negotiating skills of individual managers. This is due to the direction of information flow. Budgeting process begins by identifying the requirement demand for the products or services. This becomes the basis, at first, for calculation the number of needed actions and then, allows determine their cost (by assigning the resources used for activities).

Figure 5. Overview of the ABB-Approach. Source: Adapted from Consortium for Advanced Manufacturing-International, Cost Management

System, Activity-Based Planning and Budgeting Group [12]

The basic condition for the application of this method is the use activity-based costing method in the company

ABB is the reverse process of activity based costing in which information flowed from resources, through activities, in order to ultimately be settled for the costs objects. Budgeting based on activity based costing indicates a change in the direction of the flow of information. Starting with the requirements demand for the products or services is determined the amount of necessary actions, which then allows to calculate the cost based on the expected resource consumption.

The budgetary procedure can be divided into two stages: the operational and financial. The first is to determine the predicted demand the amount of necessary actions and resources, and to compare them with established potential, while the second translates adopted operating arrangements on the financial results (the financial budget is drawn up last, after the approval of the operating budget which must, on the one hand, be possible to achieve, on the other hand allow the objectives of the company). According to R. S. Kaplan and R. Cooper [13] the stage of the operational loop procedure may be as follows:

1. Estimation of key-factors of the budget (estimations regarding the total value of the quantities of products obtained and the sales to customers);

2. Establishment of the organizational activities (elaboration and execution of the activity-based budget);

3. Determination of the necessary resources (quantity and type) in order to perform the organizational activities;

4. Identification of the total of necessary resources in order to satisfy the demand;

5. Determination of the capacities at the level of activities and at the level of resources.

Stage 1 - The Operational Loop Stage 2 - The Financial Loop

financia

l adju

st

opera

tional

adju

st

resources capaity

RESOURCES

ACTIVITIES

COSTSOBJECTS

adjust capacity

adjustconsumption

adjust demand

adjust resources

cost

adjust price

demandrequirements

target results

financial resoults

financial balancestrategic plan

shortage or excess

balance

YES

NONO

RESOURC

ES Information system Drivers

Storage area Logistic

s

…

Means of

transport

Forklifts

Storage rocks

ACTIVITIES

Receiving, entering

and confirming orders

Planning vehicle routes

Processing inquiries

Planning shipments

Acceptance, inspection

and assembly of products

Completing products

Loading of vehicles

Storage of products

Transport to the customer

Reserve stocks and determine the

delivery date

…

Invoicing

COSTS

OBJECTS Group

………..

Group

E

Group

D Group

C

Group

B

Group

A

ACTIVITIES

RESOURCES


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If the initial financial plan is not balanced, i.e. it does not allow the achievement of the objectives in the strategy or is unsatisfactory in other respects, the ABB method allows to make some adjustments, such as the rate of resource consumption and utilization activity rate, resources capacity, their costs, the demand for the products and products prices. The procedure ends when the budget is adopted (it ensures satisfactory financial results).

V. COMPARISON OF TRADITONAL APPROACH

AND ACTIVITY BASED BUDGETING

Both analysed approaches in different ways allow for the preparation of the budget and its subsequent analysis, they put pressure on other aspects: traditional budgeting - the cost, ABB - activities. Hence, due to differences within such a budget in the traditional sense and based on activities (see “Figure 6”).

Activity-based budgeting Traditional budgets

• focus on the work volume and of

the costs of processes • measure the effects, determine

and identify the unused capacities

• identify the necessary resources for the planned production and not

in order to set out expenditure

limits • ensure the management, with the

possible of transformation of the

organizational thinking regarding the fixed costs

• focus on the used capacity versus

the unused capacity • represent a possible solution for

the budget process by increasing

the real participation of the employees

• represent a tangible solution for

the short term planning of strategic

objectives, as they focus on the

basic processes of the work place

for customer’s satisfaction • unify the efforts made by various

functions, such as: processes re-

engineering or processes revolution in a single effort directed toward

the strategic objectives planned by

the entity for a short or long term

• focus on workers and on

departmental costs • measure the effects, but do not

determine and do not identify the

unused capacities • do not fulfil the purpose of a

global budget, representing only

analytical and control • they are based on a iterative

negotiation process between the

managers of responsibility centers and the senior management

• focus on the fixed costs versus

variable costs

Figure 6. Analogy between ABB and traditional budgeting. Source:

Capusneanu [14].

The first five points shows the difference in the two approaches and their different orientation, the concept ABB is strongly focused on long-term business plan and reflected them in the forthcoming budget, it allows for deeper analysis of information. Another three points relating to ABB approach emphasize the opportunities created by it, which are not present in the traditional budgets.

VI. CONCLUSION

The authors have presented in the paper the issue of budgeting in the logistics companies. They have also pointed out that the role of logistics companies is increasing on the global market and it affects the growing competition. Therefore, logistics provides should implement a system of controlling/system of management accounting with the tool

such as the logistics budget, which allows for the planning and control of logistics costs and also promote coordination and evaluation of activities, help to motivate and evaluate the staff performance and support the internal control system of the organization.

Business entities can choose between traditional budgeting and activity-based budgeting. Both types of budgets have to considering the costs of logistics processes and their different nature. However, taking into account the specific of logistics activities, which is based on the logistics processes and flows of resources, the best tool for planning and control of costs, including the logistics costs is activity-based budgeting (ABB). This approach is better suited to the activities carried out in the unit, and thus its importance as a tool for business management is greater. But not be forgotten that the ABB approach based on the ABC system. This both methods require to the implementation first of all financial capital and time. This could mean also that only the biggest logistics companies as e.g. 3PL or LLP can consider its use. Smaller logistics companies will not plan logistics costs or they may only remain with the traditional approach, which can be detached from reality.

In this article authors only pointed out the essence of this concept and the need for its further analysis.

REFERENCES

[1] I. Fechner, G. Szyszka, “Logistyka w Polsce", Instytut Logistyki i Magazynowania, Poznań, 2010, p. 17.

[2] W. Rydzykowski, „Usługi logistyczne”, Instytut Logistyki i Magazynowania, Poznań, 2004, p. 17.

[3] H. Ch. Pfohl, „Total Qality management – Konzeption und Tendenzen, in Total Qaulity Management in der Logistik, Erlich Schmidt Verlag, Berlin, 1992, p. 10.

[4] I. Göpfer, “Logistik, Führungskonzeption und Management von Supply Chain, vol. 3, Vahlen, Stuttgart, 2013, p. 76.

[5] A. Nowak, „Budżetowanie kosztów przedsiębiorstwa“, ODDK, Gdańsk,2007, p.12.

[6] A. Karmańska, „Rachunkowość zarządcza i rachunek kosztów, Difin, Warszawa, 2006, p. 387.

[7] M. Kufel, „Koszty przepływu materiałów w przedsiębiorstwach przemysłowych. Problemy budżetowania, ewidencji i kontroli”, Akademia Ekonomiczna, Wrocław, 1990, p. 37.

[8] J. Twaróg, „Koszty logistyki przedsiębiorstw”, Biblioteka Logistyki, Poznań, 2003, p. 123.

[9] M. Biernacki, R. Kowalak, „Rachunek kosztów logistyki w zarządzaniu przedsiębiorstwe”, Uniwersytet Ekonomiczny, Wrocław, 2012, p. 91.

[10] S. C. Hansen, “A theoretical Analysis of the Impact of Adopting Rolling Budgets, Activity-Based Budgeting and Beyond Budgeting”, in European Accounting Review, 20(2), 2011, pp. 289-319.

[11] R. Cooper, R. Kaplan, “Using ABC for budgeting and transfer procing”, in The Design of Cost Management System., NJ: Prestice Hall, 1991.

[12] S. C. Hansen, D. T. Otley, W. A Van der Stede, „Practice Developmentin Budgeting: An Overview and Research Perspective”, in Journal of Management Accounting Research, 15, 2003, pp.95-116

[13] R. S. Kaplan, R. Cooper, “Zarządzanie kosztami i efektywnością”, Dom Wydawniczy ABC, Kraków, 2000.

[14] S. Capusneanu, I. Boca, C.–M. Barbu, , L.-M. Rof, D.Topor, “Implementation of Activity-Based Budgeting method in the economic entities from mining industry of Romania”, in Internaltional Journal of Academic Research in Accounting, Finance and Management Sciences, 3(1), January 2013, pp. 6-34.


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